Budget Variance Explained: Causes, Types & Analysis

Budget variance deals with a company’s accounting discrepancies. The term is most often used in conjunction with a negative scenario. An example is when a company fails to accurately budget for their expenses – either for a given project or for total quarterly or annual expenses. (The negative variance can also sometimes refer to a discrepancy in budgeting for assets and liabilitiesBalance SheetThe balance sheet is one of the three fundamental financial statements. The financial statements are key to both financial modeling and accounting.).

Types of Budget Variance

1. Adverse Variance

It’s important to discuss adverse (or negative) budget variance further because of its damaging and potentially severe consequences for a business.

One of the most common ways that a company experiences adverse budget variance is through poor estimations of future spendings. The company may assume that a project will cost less than it ends up costing, whether due to a lack of accurate information about costsFixed and Variable CostsCost is something that can be classified in several ways depending on its nature. One of the most popular methods is classification according or unexpected expenses. A company may also experience negative variance if it allows office or industry politics to dictate a target spending that is unreasonably low.

2. Positive Variance

Many companies report a positive budget variance. In order to do so, most companies establish a well-padded budget for individual projects or operations in general. They try to be as accurate as possible in allowing for expenses, with a built-in buffer of extra funds to guard against certain costs, namely:

• Unexpected costs connected to supplies
• Complications with a project/task
• Changes in the market
• Company-wide issues (scandalTop Accounting ScandalsThe last two decades saw some of the worst accounting scandals in history. Billions of dollars were lost as a result of these financial disasters. In this, change in management, procedural/operational changes)

Example of Budget Variance

Printing Company XYZ budgeted $250,000 for the production, marketing, and distribution of its business cards. It includes the cost of the cardstock needed, ink, and labor for the first quarter of the year. However, they ended up spending $265,000 in total. This means that there is an adverse budget variance of $15,000.

Simple Solutions to Budget Variance

Sometimes, the budget variance can be easily avoided. To get a clearer picture, consider the following example:

Company ABC reports an adverse electricity budget of $4,000 and a positive heating budget of $3,000. The company can simplify their accounting and avoid an overly negative variance by combining the two budgets for the purposes of reporting and accounting for their expenses. It means that they will only show an adverse budgeting variance of $1,000, which seems far more manageable than $4,000.

Final Word

Ultimately, a budget variance can be positive or negative. It’s important for a company to check its accounting records to clarify and clear up any simple budgeting variances and address significant variances in order to get a clearer idea of where it stands financially.

The best solution for avoiding budgeting variances is careful, well-researched, practical budgeting. However, in an uncertain market or economic conditions, there may be variances – either positive or negative – in even the most well-planned spendings.

Additional Resources

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